ANALYSIS: Households brace for more price increases

Jose M. Galang

Even before the inflationary effects of the coming tax reform measures and a rise in interest rates coupled with a further depreciation of the peso, the pace of increases in consumer prices already has sustained a faster upward movement.

Much of the driving force behind recent price increases apparently has been due to “imported” factors in the local consumer goods production and in services. How to moderate this accelerating rate of inflation will thus be a key concern for the Duterte government’s economic managers in the coming months.

So far, however, the outlook for inflation does not appear to threaten growth expectations of most sectors of the economy. Producer prices, which are regarded as a bellwether of future retail price movements, were up by 2.2 percent from year ago last February, with 9 out of 20 surveyed industries showing price increases—including significant surges in petroleum products.

Any major conflagration in the already volatile global economic conditions caused by threats of possible major shifts in policies of the world’s strategic trading countries could also dramatically change the outlook for domestic inflation. The Philippines’ top sources of imports—including China, Japan and the United States—are experiencing rising inflation rates and costlier goods are bound to land in local markets in the months ahead.

Higher inflation in March

According to data released earlier today by the Philippine Statistics Authority (PSA), prices of goods and services related to imported crude oil (primarily electricity, cooking gas, motor fuel, along with transport costs) connived in pushing the March all-items inflation rate to 3.4 percent, which was slightly higher compared to the 3.3 percent recorded in the previous month. The pace was substantially faster, however, than the 1.1 percent inflation in March last year.

With the March performance, the average inflation rate for the first quarter of 2017 tripled to 3.1 percent from 1.1 percent for the same three-month period last year.

The PSA report said that even separating prices of usually volatile items as food and energy products, a slightly faster inflation rate of 2.9 percent was noted in March compared to 2.7 percent in February, but substantially higher from 1.5 percent in March 2016.

Prices of alcoholic beverages and tobacco posted the fastest rate of increase in March at 6.4 percent (from 6.0 percent in February), while prices of housing, water, electricity, gas and other fuels rose by 4.0 percent (from 2.9 percent in February).

Food price inflation stabilized at 4.2 percent in March against 4.3 percent in February. However, the March record was a sharp rise compared to 1.6 percent tracked in same month last year.

The faster movement of consumer prices was felt across the nation, with the National Capital Region (or Metro Manila) seeing an inflation rate of 4.0 percent, compared to 0.2 percent in the same month last year. In areas outside Metro Manila, the inflation rate in March was 3.3 percent, compared to 1.3 percent in the year-before month.

Consumers ‘less optimistic’

All this is not lost on the Filipino households. Consumer confidence on balance declined by a modest rate in the first quarter of this year compared to the preceding quarter, with expectations of higher prices of goods and household expenditures topping the pessimists’ worries, according to a survey last January 19-31 conducted by the Department of Economic Statistics of the Bangko Sentral ng Pilipinas.

The survey’s confidence index, which shows a net rating of positive household sentiments against pessimists, is measured across three indicators: the country’s economic condition, family financial situation, and family income. Still, the overall consumer outlook, according to the Bangko Sentral unit, remained “broadly steady” despite the weaker confidence level.

For the second quarter and the remainder of 2017, consumer confidence is “less optimistic” although the net index ratings in all indicators remain on the positive side, according to the survey results. The respondents’ less favorable outlook results from households’ expectations of higher prices of goods, depreciation of the peso, poor agricultural harvest due to bad weather conditions, and a slowdown in business activity.

There is an increase in the number of households that foresee for the 2017 second quarter increases in spending on house rent and furnishing, water, electricity, fuel, and transportation. But there are fewer households that expect to spend more for clothing and footwear, medical care, communication, education, recreation and culture, and personal care and effects, the survey said.

Amid these expectations, in general, more households said they were setting aside savings for contingencies like emergencies, education, retirement, health and hospitalization, business capital and investment, and real-estate purchases.

On the other hand, in the case of families of overseas Filipino workers (OFWs), almost all were planning to use remittances they receive to “purchase food and other household needs”, with a smaller proportion of these households also planning to buy consumer durables.

The survey also noted a decline in the percentage of OFW households setting aside portions of the remittances for savings, education, debt payments, investments, and purchases of house or motor vehicles. The reduced savings “could be due to the higher prices of goods and expected increases in expenditures on their basic goods and services,” the survey concluded.

What these survey findings show is that while Filipino households feel they can weather an anticipated wave of price increases, the majority will not be able to set aside money for unexpected events. Inflation will gnaw into household finances.

Rising domestic liquidity

To the country’s monetary authorities, the inflation trend in the first quarter should not be a surprise. The amount of cash on the streets—measured as M1, or currency in circulation plus demand deposits in the Bangko Sentral terminology—sustained a steady expansion of 15.1 percent each in January and February this year, compared to year-before levels.

Such rates of M1 annual growth are actually on the high end of the ideal range, still consistent with overall economic growth objectives. This can indicate that any pressure for liquidity expansion in the coming months will be met with interest rate increases to stave off any undesirable boost to consumer prices.

Many economists believe that any money supply expansion beyond 15 percent could stoke inflation that could really hurt consumers—which the Philippines last experienced during the dying years of the Marcos dictatorship in the mid-1980s.

For now, monetary authorities are keenly watching risks surrounding the inflation outlook which, the Bangko Sentral says, “remains titled toward the upside, given the transitory impact of the proposed tax reform program as well as possible adjustments in transportation fares and electricity rates.”

A possible saving grace could be the government plans to allow more rice imports. An increased supply of the commodity can help moderate increases in food prices. Also, manufacturing industries appear to still have sizeable unused capacity—slightly less than a fourth of all industries were operating at full capacity as of last December—and activating this will ease any price-raising tightening of supplies of manufactured goods in the market.